Fiscal Dominance: Implications for Bond Markets and Central Banking

Jean Barthélemy, Eric Mengus and Guillaume Plantin ()
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Jean Barthélemy: Banque de France, Paris, France
Guillaume Plantin: Centre for Economic Policy Research, London, United Kingdom

Annual Review of Financial Economics, 2025, vol. 17, issue 1, 113-132

Abstract: Fiscal dominance refers to situations in which monetary policy is constrained by the public sector's budget constraint. Large shifts in the dynamics of sovereign debts, surpluses, and central banks’ balance sheets since the great financial crisis have created the perception of a heightened risk of such fiscal dominance in major jurisdictions. This article reviews the theoretical and empirical literature on fiscal dominance. We offer a simple theory in which fiscal dominance arises as the outcome of strategic interactions between the government and the central bank.

Keywords: game of chicken; fiscal and monetary interactions; fiscal dominance (search for similar items in EconPapers)
JEL-codes: E31 E52 E62 H63 (search for similar items in EconPapers)
Date: 2025
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Related works:
Working Paper: Fiscal Dominance: Implications for Bond Markets and Central Banking (2024)
Working Paper: Fiscal Dominance: Implications for Bond Markets and Central Banking (2024)
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DOI: 10.1146/annurev-financial-112823-015801

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